United States District Court, C.D. Illinois, Peoria Division
DARROW UNITED STATES DISTRICT JUDGE.
hospitals dominate the market for inpatient medical services
in Peoria, Illinois. One, St. Francis, is about twice as big
as the other, Methodist. St. Francis offers many high-end
services that neither Methodist nor any other hospital in
Peoria offer, such as sophisticated pediatric care and solid
organ transplants. Methodist sued St. Francis because St.
Francis has entered into contracts with some commercial
health insurance companies that require those insurers to
exclude Methodist from the insurers' provider networks.
St. Francis' exclusive contracts violate federal
antitrust law, Methodist has alleged, because they
unreasonably restrain trade by substantially foreclosing
Methodist's ability to compete for commercially insured
patients' business, which is far more profitable for a
hospital than business from publicly insured patients. St.
Francis has moved for summary judgment on all claims. The
motion is GRANTED.
General overview of healthcare delivery and payment
an antitrust case about the provision of healthcare by and
payment to various hospitals in Peoria. Some background on
the way health insurance works, broadly speaking, is
necessary to understand the legal claims asserted and this
motion's resolution. The hospitals are called providers
and the entities that pay for the healthcare, usually either
private or public insurers, are called payers.
most general level, providers recoup their costs in one of
three ways-they bill the government if the patient is covered
by public insurance (Medicare or Medicaid, for example); they
bill an insurance company if the patient is covered by
private insurance; or they bill the patient directly if he is
not insured. More people are covered by government health
insurance than by commercial health insurance, and uninsured
people make up a very small slice of the overall
evidence in the record suggests that patients covered by
government insurance are not profitable for hospitals;
several executives testified that payment for services
provided to those patients do not cover the hospitals'
costs. The ratio of patients covered by government insurance
to patients covered by commercial insurance is called a payer
mix. Providers strongly prefer a payer mix that includes a
higher proportion of commercially insured patients.
insurance companies, typically large national firms, sell
managed care plans to employers or individual consumers.
Those plans can take several forms, but in this case the only
two kinds that matter are called preferred provider
organizations (“PPO”) and health maintenance
organizations (“HMO”). The major differences are
that HMOs are usually cheaper but more restrictive to the end
user. PPOs can be further classified into two broad groups:
self-insured and fully funded. In a fully funded insurance
plan, the payer (the commercial insurer) administers the plan
and also bears the cost of the healthcare provided to the
insureds. In a self-insured plan, also called an
administrative services only plan (“ASO”), an
employer, usually a large one, contracts with the payer to
deal with the providers but bears the cost of healthcare
provided to the plan's members.
content of a health insurance plan is dictated by contracts
made between providers and payers. Those parties dicker over
terms such as duration and price of services. Another
important term addresses the provider network. From a
patient's point of view, a provider network lists the
providers they can visit and receive lower prices for medical
services, as compared to prices charged by out-of-network
providers. The fight in this case arises out of terms dealing
with network exclusivity. Network exclusivity in a health
insurance plan refers to the network's breadth. A plan
has a broad, or open, network if a patient can visit many
different providers and still receive a favorable rate. A
plan has a narrow network if a patient may receive favorable
rates at only one or few providers. The use of networks
creates obvious incentives for commercial insurers to funnel
their insureds (via other incentives, like deductibles and
co-pays) toward in-network providers.
simple exclusivity clause might look like this: in return for
a lower rate on services at hospital X, payer Y may not
include hospital Z in its plans' networks. Providers
generally offer payers lower rates in return for network
exclusivity. Conversely, if a payer wants to offer a broader
network to its customers (that is, employers or individual
purchasers of health insurance), it typically must agree to
pay higher rates to providers. The parties and literature
refer to the pricing difference between broad and narrow
networks as an open-network premium. Providers want narrow
networks because even though the prices they charge to
commercially insured patients will be relatively lower, the
incentives created by the network pricing structure will
increase commercially insured patient volume. Payers usually
seek broader networks, as long as the prices are not too
high, because their customers value flexibility when making
decisions regarding healthcare.
case, the evidence tends to show that St. Francis strongly
favors exclusivity when bargaining with payers. Exclusivity
has many benefits to a provider, and the evidence suggests
St. Francis thought that predictability of commercial
inpatient volume was very important given several of its long
term capital investments. In particular, it does not want
payers to include Methodist in any network that also includes
St. Francis, other things being equal. Methodist also has
several exclusive contracts, but they are all many times
smaller than St. Francis' largest exclusive contract.
Both hospitals' networks will be discussed in greater
healthcare market in Peoria
are six hospitals in the geographic area relevant to this
case. St. Francis is the biggest, it has 616
beds. Methodist is the second largest, it has 330 beds.
Proctor hospital is third largest with 220
beds. There are three other hospitals in the
area: Pekin (107 beds); Eureka (25 beds); and Hopedale (25
beds). Methodist and St. Francis are located very close to
one another-they are separated by less than a quarter mile.
addition to being the largest, St. Francis is by far the most
advanced hospital in the area. It is the only Peoria hospital
that can perform solid organ transplants; it is the only
Peoria hospital that has the highest level of trauma care; it
is the only Peoria hospital with a neonatal intensive care
unit; and its pediatric unit is far more extensive and
advanced than the other hospitals'. That pediatric unit
includes the Children's Hospital of Illinois, and it
amounts to 136 of St. Francis' beds. St. Francis is also
a teaching hospital (generally a boon for physician
recruitment). According to Methodist's expert's
report, “18.3% of [St. Francis'] commercial
inpatient days are attributable to inpatient services for
which” St. Francis is the exclusive or near-exclusive
provider. See Capps Report ¶¶ 105-108, MSJ
Ex. 74, ECF No. 146-14. Beyond those services for which St.
Francis is the exclusive provider in the geographic region
St. Francis and Methodist are relatively fungible, although
some of the evidence suggests Methodist has higher quality of
care metrics than St. Francis. The evidence also shows that,
other things equal, people prefer to get medical care
locally; if a cardiac patient from Peoria can undergo the
same procedure in Peoria as in Chicago, she will likely get
it done in Peoria.
the familiar major national health insurance companies offer
products in the Peoria market. They include Blue Cross Blue
Shield; Humana; Coventry; Aetna; and some others.
Peoria's commercial health care market has a quirk-the
second largest source of commercially insured patients is
Caterpillar, the area's largest employer, rather than
from a health insurer. Caterpillar employees primarily use an
Francis' exclusive contracts
litigation arises out of several contracts that have
exclusivity provisions that favor St. Francis. The first
three are between St. Francis and different commercial
insurers and the last dealt with the health care for
Cross Blue Shield
Cross Blue Shield (“BCBS”) is the largest and
most important commercial insurer in the market. It offers
two products relevant to this case: a PPO and an HMO. The PPO
has been exclusive to St. Francis since 2002. The HMO is
exclusive to Methodist.
BCBS PPO is roughly twenty times larger than the BCBS HMO.
Capps Report ¶ 118. The BCBS PPO accounted for 32
percent of all admissions and 34 percent of all payments at
St. Francis and Methodist, combined, in 2012. Capps Report 54
Fig. 17. The BCBS PPO is by far the largest
commercial plan in the market. The same figures for the BCBS
HMO are 1.6 and 2.1 percent. St. Francis derives 39 percent
of its commercial inpatient revenue from the BCBS PPO.
contract from 1982 between Methodist and BCBS governs the
out-of-network pricing for BCBS PPO plan members who are
treated at Methodist; when Methodist treats BCBS PPO plan
members, it is reimbursed by BCBS under the terms of the 1982
contract. Methodist has since 2006 operated a matching
program, pursuant to which it waives all charges to
out-of-network commercially insured patients above what those
patients would pay if they received the same services at St.
Francis. See Capps Report ¶ 545. The effect of
the matching program is that care received out of network at
Methodist is not more expensive to BCBS PPO insureds than
care received in network at St. Francis-in theory it removes
the patient's incentive to visit St. Francis at the
expense of Methodist. Methodist actively marketed its
matching program. Methodist's revenues from BCBS PPO
patients grew steadily (between 5 and 10 percent per year)
since the program's implementation, and in 2010 resulted
in $40 million in revenue. To put that figure into
perspective, Methodist's total operating revenue for 2013
was $380 million.
is the second largest commercial insurer in the area-it
accounted for 13 percent of commercial admissions and 10
percent of commercial payments in 2012. Humana's network
does not include Methodist.
became a major player in the Peoria market when it acquired
what used to be OSF's commercial health insurance
business. OSF (St. Francis' parent) conditioned the
transaction on Humana keeping St. Francis as the exclusive
in-network provider. A shade under 20 percent of the Humana
covered lives, about 20, 000 at the time of the 2008
acquisition, are OSF employees (OSF is the second largest
Peoria area employer). In return for exclusivity, Humana
receives favorable rates-it is the beneficiary of what in the
industry is known as “most favored nation” status
Alliance Medical Plans (“HAMP”) accounts for 5
percent of commercial inpatient admissions and 6 percent of
commercial payments in the market. The relevant HAMP plan is
an HMO. HAMP used to be affiliated with a standalone regional
clinic called the Carle Clinic Association. In 2009, OSF
purchased one of the Carle Clinic locations (in Bloomington,
Illinois), and in connection with that transaction HAMP
agreed to an exclusive provider agreement with St. Francis.
Before the acquisition, OSF was not an in-network provider
for HAMP, but Methodist was.
and Carle Clinic have a strong link-“30 or 40”
percent of the clinic's patients were insured by HAMP.
The overwhelming majority of HAMP patients had Carle
physicians as their primary care physician, with the
remainder assigned to Methodist physicians. Once OSF bought
the clinic, a conflict emerged from St. Francis' point of
view: most of the doctors at the clinic were aligned with an
insurer that dealt with Methodist. Further, OSF brought the
Carle doctors into its physician group in fall of 2009.
contends that HAMP signed an exclusive contract with St.
Francis under coercion from St. Francis. St. Francis argues
that the reason HAMP switched providers is that Methodist
failed to accept a risk sharing clause as part of a renewed
contract, but that St. Francis did, in fact, agree to the
risk-sharing aspect of the contract. The evidence is disputed
on the point, that is, a jury could conclude HAMP entered the
exclusive contract under pressure from St. Francis or due to
Methodist's failure to accept a share of HAMP's risk.
Other St. Francis exclusive payers
lone remaining exclusive payer in this case is Aetna. Aetna
only amounts to a little over 1 percent of the market.
health plans have changed significantly over the past several
years, though they have been mostly self-insured for all the
years relevant to this litigation. Up until 2010, Caterpillar
offered its employees a self-insured PPO administered by
United. The PPO was a St. Francis exclusive network, and had
been since at least 2001 pursuant to a long term contract. In
2009, Caterpillar also began to offer its employees a
fully-insured HMO from HAMP. The HMO was a Methodist
exclusive. The PPO was far more popular with Caterpillar
2010, Caterpillar decided to move away from exclusive
networks. Following what the evidence suggests were
protracted negotiations, Caterpillar decoupled the services
that only St. Francis could provide with those that
overlapped with Methodist's capabilities, and opened its
PPO network up to include both hospitals. In 2011, the
Caterpillar HMO network opened up to include both hospitals
as well. For the years 2005 through 2009, for every one
Caterpillar insured admitted to Methodist, 44 were admitted
to St. Francis. Following the opening of the network, that
is, for the years 2010 through 2013, for every Caterpillar
inpatient admitted to Methodist there were 5.4 admitted to
St. Francis. (For example, in 2012 there were 1, 737
Caterpillar patients at St. Francis and 351 Caterpillar
patients at Methodist. In 2008 the numbers were 2, 986 and
paid to open the networks. That is, it lost the discount it
enjoyed when St. Francis was the exclusive provider for the
PPO. There was a 38 percent price increase of St.
Francis' unique-to-Peoria services (the so-called
tertiary services), and a general 3.7 percent price increase
for non-tertiary inpatient services.
hired an economist named Cory Capps to write a report showing
that St. Francis' exclusive contracts have substantially
foreclosed Methodist from competing in the market for
commercially insured patients in and around Peoria. Among
other things, Capps' report offers a quantification of
the total percentage foreclosure for two years, 2009 and
2009, according to Capps, 54 percent of the market was
foreclosed by three commercial plans that excluded Methodist
from their provider network: the BCBS PPO; the Caterpillar
PPO; and the Humana plan (formerly OSF's plan). And in
2012, Capps' figure was similar: 52 percent, based on the
exclusivity found in the BCBS PPO; the Humana plan; the HAMP
plan; and the very small Aetna plan (Caterpillar had by then
opened its network).
Methodist's legal claims
filed a nine-count complaint against St. Francis that alleges
three federal antitrust claims and six claims arising under
Illinois law. The antitrust claims assert violations of both
sections of the Sherman Act. They contend that St.
Francis' exclusive dealing has unreasonably restrained
trade; that St. Francis has unlawfully maintained monopoly
power; and that St. Francis has sought monopoly power through
basis of Methodist's claims is St. Francis' exclusive
contracts. Methodist alleged that St. Francis wielded market
power because it is the only area hospital that provides
certain essential services and was therefore what is known in
the healthcare industry as a must-have hospital. It used that
market power, according to Methodist, to coerce commercial
payers into excluding Methodist from their provider networks
and to pay greater than competitive rates by threatening to
withdraw from the payers networks, thus making the
payers' products less competitive in their marketplace.
See Compl. ¶¶ 58-63, ECF No. 1.
Francis' motion for summary judgment and Methodist's
Francis has filed a motion for summary judgment on all
claims. As to the federal antitrust claims, St. Francis
contends that its exclusive contracts with commercial payers
do not substantially foreclose Methodist from competing for
commercial patients and because, as explained in greater
detail below, substantial foreclosure of competition in the
market is one of the major legal issues in this case, the
antitrust claims fail as a matter of law. St. Francis
concedes that it exercises market power for purposes of its
summary judgment motion, and makes several related arguments
that directly address Methodist's Sherman Act claims.
it contends Methodist was not substantially foreclosed from
the market for commercially insured patients in Peoria
because, in essence, the market was functioning properly. In
support of this first argument, St. Francis (1) highlights
Methodist's “alternative distribution channels,
” including the commercial health plans for which
Methodist was in network; and (2) points out that many Peoria
employers offer their employees a choice between a St.
Francis exclusive plan and a Methodist exclusive plan,
meaning the exclusive contracts do not prevent employees from
choosing Methodist. Next, St. Francis highlights
Methodist's match program. If a BCBS PPO member had a
choice between the two hospitals and price was not a factor,
then the exclusive contract could not have unfairly
foreclosed competition, according to St.
Francis. Finally, St. Francis makes what is in
essence an embedded Daubert motion; it goes through
Capps' report line by line and identifies purported
errors in his calculation of the rate of foreclosure. The
assault on Capps' arithmetic is made up of five distinct
points, which the Court will address in turn below. As a
throwaway argument (subheading “6”), St. Francis
claims no foreclosure exists because Methodist has been able
to compete for all the relevant exclusive contracts.
Francis' foreclosure arguments, therefore, are distinct
but related-first it contends that Methodist is able to
compete at some level for every commercially insured patient
in the market, but even if it is not able to compete,
Capps' foreclosure calculation falls far below the
threshold established by case law to make out substantial
foreclosure. The summary judgment motion then focuses on the
outpatient market claim. St. Francis states that there is an
“obvious failure of proof” because Capps did not
perform a separate analysis for the outpatient market;
instead he assumed the market dynamics were identical as
those for the inpatient market.
from its arguments related to substantial foreclosure, St.
Francis asserts that Methodist cannot prove an antitrust
injury. Antitrust injury is injury to competition, like
higher prices or poorer quality, injury to a competitor does
not satisfy the requirement. Because antitrust injury is an
essential component of a Sherman Act claim, summary judgment
is appropriate. Finally, St. Francis argues that the product
market in this case (a threshold inquiry in any antitrust
case) should encompass both commercial and government
patients. If the evidence supports such a broad product
market, as opposed to one that includes only commercial
payments, then the claims fail.
disagrees. First, Methodist addresses the arguments related
to substantial foreclosure. It asserts that it was not, in
fact, able to compete for the BCBS PPO contract because of
St. Francis' exercise of market power. It argues that the
alternative distribution channels identified by St. Francis
are not, in fact, adequate. And it finally responds to the
attack on Capps' report. Methodist also points to several
facts that it contends are sufficient to ...